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Here’s our monthly article on legal developments in the auto sales, finance and lease world. Last month’s report was skimpy, but this month’s is skimpier yet. The Consumer Financial Protection Bureau seems to have dug a foxhole and pulled the sod in on top of itself. That doesn’t mean that the CFPB is inactive, though. Instead of pressing with new rules and high-profile enforcement actions, the Bureau seems to be focusing hard on supervisory activities. That makes sense, since supervision isn’t in the public eye and is a lot less likely to draw fire from Congressional Republicans and other CFPB critics. In any event, this month’s article features our “Case of the Month,” activity from the CFPB, the Federal Trade Commission and two state attorneys general.

Why do we include items from other states? We want to show you legal developments and trends. Also, another state’s laws might be a lot like your state’s laws. If attorneys general or plaintiffs’ lawyers are pursuing particular types of claims in other states, those claims might soon appear in your state.

Note that this column does not offer legal advice. Always check with your lawyer to learn how what we report might apply to you, or if you have questions.

For federal and state regulators, dealership ads are the lowest-hanging fruit. A photocopy of a newspaper ad or a screen shot of a website is all the proof needed to show many violations. Once a dealership’s obviously noncomplying ad is challenged, the only question remaining is the number of zeroes needed to complete the check the dealership writes to pay the assessed penalty.

Where do your ads come from? Do you buy ad programs from a vendor, or do you craft the ads yourself? If you use a vendor, what written assurances about compliance do you demand before you sign the vendor’s contract? If you are doing the ads yourself, how much do you know about the federal and state laws that regulate your ad content? If you’re just duplicating ads from another dealership that you picked up at your last 20-group meeting, you probably need to be in another business.

Federal Developments

VW Clean Diesel Claims. On May 17, the FTC announced that a federal district court judge in San Francisco signed a settlement negotiated by the FTC and private plaintiffs providing for consumer redress and starting the formal claims process for owners of Volkswagen, Audi, and Porsche 3.0 liter TDI diesel cars. The settlement deals with Volkswagen’s allegedly misleading “clean diesel” claims. The FTC will monitor VW’s compliance with the settlement’s provisions, which include special protections for those in the armed forces and rural consumers who may be far from the nearest dealer. Under the 2.0 liter and 3.0 liter settlements, Volkswagen will offer consumers over $11 billion in compensation. The FTC announced in February that consumers who bought 3.0 liter vehicles will receive up to $1.2 billion in compensation in addition to the more than $10 billion redress fund already created for 2.0 liter consumers. In all, consumers who bought affected “clean diesel” vehicles will receive up to $11.5 billion, and the court may hold Volkswagen in contempt if it makes deceptive environmental claims in the future.

Hold On to Your Wallet! The FTC held a conference in Washington, D.C, on May 24 that examined the state of identity theft now and how it may evolve in the future. The “Planning for the Future” event brought together industry representatives, consumer advocates, government officials, and others.

The conference included panel discussions on how identity thieves acquire and use consumer information, how websites trade in stolen consumer information, the impact of identity theft on financial services, health care and other sectors, the challenges identity theft victims face, and resources available to them. FTC technical experts described how consumer data available online is used by malicious actors.

State Developments

The attorneys general for Massachusetts and Delaware have settled charges against a major finance company arising from the company’s subprime auto financing operations. The AGs had alleged that the company funded auto loans (both AGs used the term “loans” to refer to what were undoubtedly retail installment contracts) without having a reasonable basis to believe that the borrowers could afford them and knew that the reported incomes used to support credit applications submitted to the company by car dealers were incorrect and often inflated. The Massachusetts AG’s Office found that the company’s own internal audit concluded that the company’s oversight of auto dealer conduct when making subprime loans was inadequate. Despite identifying a group of dealers that had extremely high default and delinquency rates and other problems, the company continued to fund loans through these dealers. The company also allegedly identified a group of dealers it called the “fraud dealers,” but continued to fund loans through them.

The Delaware settlement requires business reforms by the company, including procedures to screen contracts originated by Delaware dealers to ensure that they comply with Delaware law and meet minimum documentation requirements. The company also agreed to prospectively identify and repurchase subprime loans sold to third parties that it later determines do not comply with Delaware law.

The Massachusetts settlement requires $16 million in payments to more than 2,000 consumers and a $5 million payment to the state. The Delaware settlement requires the company to pay $2.875 million into a trust to benefit hundreds of harmed Delaware consumers. The company will also pay just over $1 million to the Delaware Consumer Protection Fund. Under the terms of the settlements, the company neither admitted nor denied either state’s allegations.

These enforcement actions are likely to have far-reaching consequences. This finance company will be tightening its procedures to eliminate dealer fraud, but you can expect that every finance company hearing about the Delaware and Massachusetts action will be doing so, as well.

Case of the Month

Justin Bare bought a car with an anti-theft system manufactured by Innovative Aftermarket Systems, LP. As part of the sale, Bare bought Innovative’s “Protection Plus” policy, which included a promise to pay Bare $2,500 in the event the anti-theft system did not deter theft and Bare’s car was not recovered.

Subsequently, Bare’s car was stolen and not recovered. Bare made a claim under Innovative’s policy, but Innovative denied his claim as untimely. Bare, on behalf of a similarly situated class of plaintiffs, sued Innovative, alleging various causes of action for violations of West Virginia insurance law. Innovative moved to dismiss, arguing that the anti-theft system’s policy was not insurance.

The federal trial court granted Innovative’s motion. Innovative argued that because the policy was not insurance, Bare’s claims that it violated West Virginia’s insurance law must fail. West Virginia insurance law exempts warranties. A warranty includes, “in relation to a product[,] . . . an undertaking that guarantees indemnity for defective parts … or other remedial measures … and that is made solely by the manufacturer, importer or seller of the product … without payment of additional consideration, not negotiated or separated from the sale of the product … and incidental to the sale.”

Analyzing West Virginia’s warranty exemption, the court found that (1) Innovative’s policy was simply a guarantee by the anti-theft system’s manufacturer of the system’s performance, (2) Bare did not claim that he purchased the policy separately from the anti-theft system, and (3) the monetary benefit under the policy would be paid only to Bare. Therefore, the court concluded that the policy was a warranty and exempt from West Virginia insurance law.

Do you know the rules that apply to the sale of “ancillary” or “aftermarket” products during the F&I process? These rules vary by state and by product, and, as this case illustrates, a consumer’s lawyer might allege that insurance laws apply to the products. If you haven’t had each product you sell vetted for compliance under state and federal law, it’s time to get a move on.